The Internal Revenue Service (IRS) is in charge of taxation and enforcing relevant laws. It is also within their powers to request an interview with you on various grounds, such as issues with trust fund taxes. This interview is intended to verify if you’re somehow connected or liable to the tax deficiency identified by the agency.
The Trust Fund Recovery Penalty Interview is a procedure that aims to settle disputes and discrepancies regarding trust funds. It is also known as the 4180 Interview because the guiding document is the IRS Form 4180, the Report of Interview With Individual Relative to Trust Fund Recovery Penalty.
If you find yourself getting an interview request from an IRS agent regarding your trust fund, which could also include concerns about your income tax, here are a few steps on how to avoid the trust fund recovery penalty interview, or how to avoid the trust fund recovery penalty altogether.
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More Than Unpaid Income Tax: What is the Trust Fund Recovery Penalty
A responsible person for the withholding, accounting, or payment of certain employment taxes on behalf of a business can be personally liable for a specific penalty that is equivalent to the value of the unpaid trust fund tax, including the interests.
Taxes Covered by the Trust Fund Recovery
The taxes concerned, collectively called trust fund taxes, include the following:
- Withheld income taxes
- Unpaid taxes under the Federal Insurance Contribution Act
- Social security taxes
- Railroad retirement taxes
- Collected excise taxes including those on communications services, legitimate air transport, FIRPTA taxes
- Other employment taxes
Identifying Who To Invite for a 4180 Interview
Technically speaking, a responsible person for trust fund recovery penalty can include the following:
- Company tax professionals
- The revenue officer for the business
- People working with IRS revenue officers
- Corporate directors or shareholders
- Employees, especially those with access to sensitive information or those with the responsibility in making financial decisions
- Other employees
Establishing Guilt and Liability
Before requesting an interview, the IRS must first prove willfulness, that, according to law, it was intentional from the concerned personnel. To establish willfulness, the following criteria are checked:
- Must be, or should be, aware of the outstanding taxes of the company
- The responsible person has to either intentionally disregard the applicable law, or simply be unaware or indifferent of the requirements (without evil intent).
For People Directly Liable for Trust Fund Taxes
For people directly liable for unpaid trust fund taxes called to a 4180 interview, the simplest solution is to settle the tax debts, usually including payroll taxes or federal tax deposits. By paying trust fund taxes, the concerned individuals are generally allowed to cancel the interview.
Similarly, to establish that there was no ill intent in the accrued tax debt, the responsible person can also sign the IRS Form 2751 (Proposed Assessment of Trust Fund Recovery Penalty) and set up payment plans or apply for a settlement of these tax matters.
However, if the employment tax liability that is subject to the IRS recovery penalty is below $25,000, the company can pay it back over a span of 24 months. However, it requires you to create a direct debit.
For People Not Liable for Trust Fund Taxes
There are instances where people are requested and yet they might not have anything to do with the unpaid payroll taxes or any component of the trust fund recovery. In this case, you can start by arguing your liability. Be ready, though, as the process would require legal assistance or tax professionals who can assert your position. Basically, your legal counsel will have to show that you’re not responsible for the problem even if you work with the company finances.
If you’ve signed Form 2751 but later discovered that you’re not liable, an experienced lawyer can help make your case. This is common for employees coerced, blackmailed, intimidated, or tricked by superiors or co-workers into signing the form.
Avoiding the Unpaid Taxes If You’re Incapable of Paying
There are instances where the trust fund taxes come as a result of failing finances. If the IRS has enough reason to believe that you can no longer settle, it will start looking for other ways to recover the missing funds. To stop the Service from chasing you and keep your outstanding balance from accruing interest, you can prove your inability to pay through IRS Form 433A. Don’t forget that the IRS can file a tax lien or levy your property for unpaid taxes.
It is the same form in applying for personal tax liability settlements. In this form, details about your finances are to be disclosed. Usually, it requires a number of supporting documents as attachments: credit card history, mortgages, bank statements, and more.
However, this is not an easy task as although you argue that you can no longer pay, the IRS might argue otherwise. Assets and wages can be collected in return.
The Trust Fund Recovery Penalty Interview is a corrective measure implemented by the IRS to go after companies who willfully neglect their tax responsibilities. The strategies mentioned above are for dealing with the dreaded 4180 Interview. In terms of preventing this interview from happening, there’s no better preventive measure than exercising due diligence in terms of pay